Cost, Profit and Price
To determine the price of an object, you have to understand the relationships among cost, profit and price. First, let’s get some
definitions straight...
is how much money it takes to produce an item. Be careful! This includes manufacturing
Cost Cost
costs, the cost of shipping the items to your studio, warehouse space (if needed), and other
related expenses. If you’re creating the item yourself, the costs would include your raw
materials and the worth of your time.
Price Price is how much money a customer must pay to you (or to a retailer) to purchase your item.
Profit Profit is the money left over after you subtract COST from PRICE.
Determining a price
Before we determine the price, we have to understand our costs. Then, we have to
determine the profit, based on what the market will bear. To help us keep these numbers
straight, let’s consider the following chart...
The relationship between “total” and “unit”
COST
The numbers in
this row represent
all of the items
you produced —
the entire group.
Total Cost
The numbers in
this row represent
one, single item —
in other words, a
“unit”
Unit Cost
It’s the same for
Profit and Price.
That works in
reverse, too! If I have
unit cost —and I want
to find total cost — I
can multiply unit
cost by the number
of units.
It’s the same for
Profit and Price.
PRICE
Total Profit
Total Price
Number of units
Unit Profit
COST
If I have the total
cost — and if I want
to find the unit cost
— I can divide the
total cost by the
number of units.
PROFIT
tal
Total
to Cost
y
d b its
e
d
i
div of un
ber
num
als
equ ost
Unit Cost
c
unit
÷
COST
t
cos
l
a
..
totCost
ls.
Total
a
u
eq
er
umb
n
the units
of
he
st
UnittCost
ime ost
c
unit
x
PROFIT
t
cos
tal
fit
pro
Total
to Profit
y
d b its
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d
i
un
iv
of
Numberdof eunits
r
b
num
als
equ rofit
Unit Profit
p
unit
÷
PROFIT
it
rof
p
al ...
totProfit
Total
als
equ
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s
Number
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he
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ime rofit
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Unit Price
PRICE
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Pric
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Total
toPrice
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ber
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Unit Price
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PRICE
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ot ls...
TotaltPrice
a
equ
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umb
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the units
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e
Unit Price
m
i
t
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unit
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The relationship between cost, profit and price
When you sell an item, your profit is the amount of money that’s left over after you pay your costs.
On our chart, it works like this...
COST
+
COST
Total Cost
PROFIT
=
PRICE
PROFIT
PRICE
Total Profit
Total Price
Number of units
Unit Cost
UNIT
COST
+
Unit Profit
Unit Price
UNIT
PROFIT
UNIT
= PRICE
...and in reverse, it’s Price - Profit = Cost. Or Unit Price - Unit Profit = Unit Cost:
COST
=
COST
Total Cost
PROFIT
-
PRICE
PROFIT
PRICE
Total Profit
Total Price
Number of units
Unit Cost
UNIT
COST
Unit Profit
=
UNIT
PROFIT
Unit Price
-
UNIT
PRICE
Checking your data
Once you understand how Cost, Profit and Price are inter-related, you can plug a number in anywhere and find the other
numbers — as long as you know the number of units. You can either work across the chart to the left, across to the right, up, or
down. And as long as you’re following the rules we just discussed, you should get the right answer. And — better yet — you can
check the answers you got by seeing if they work out in all directions.
Once you fill in your chart, take a moment to make sure it works in all of the directions. That way you’ll know that you’ve got
good data!
Starting with costs
In almost every merchandise launch, you will start with total costs and number of units. These are the two factors that you will
most likely be working with at the beginning. Remember: your costs are way more than the fee that a producer charges you to
make the merchandise. It includes shipping that merch to you, any storage costs, insurance costs related to storing them, and
so on. To really make sure you’re setting a price that will turn a healthy profit, you have to first gauge all of the costs.
Let’s do an example
So, let’s try an example. We’re thinking about producing a plush bunny. We’ve contacted a manufacturer who has quoted us a
price of $800 for 350 stuffed animals. It’s going to cost $200 to ship them, we’re going to have to rent storage space at $85
(for the year), and we’re going to carry a modest insurance policy on the storage space for $50.
Production:$800.00
Shipping:$200.00
Storage:$85.00
Insurance:$50.00
TOTAL:$1135.00
COST
Total Cost
$1135
PROFIT
PRICE
Total Profit
Total Price
Number of units
Unit Cost
350
Unit Profit
Unit Price
To find the unit cost, we divide the total cost by the number of units. Simple, right?
COST
Total Cost
÷
$1135
PROFIT
PRICE
Total Profit
Total Price
Number of units
Unit Cost
$3.24
350
Unit Profit
Unit Price
Now, in a real world situation, we’d have a decision to make. What should the unit price be? We use a
number of factors in the decision — and one of the main ones is this: What are comparable items on
the market selling for. The fancy-schmancy way economists talk about this is by asking “What will the
market bear?” In other words, what unit price is supported by the prevailing demand for this item.
If the market-supported unit price for this item is below your unit cost... STOP! You may not enter this
product on the market safely! Why? Because you’re going to be forced to price your merchandise too
high — just so you can cover your costs!
For the sake of this demonstration, let’s say that we’ve determined that the market will bear a $9.99
unit price for a stuffed-animal duckie.
COST
Total Cost
$1135
PROFIT
PRICE
Total Profit
Total Price
Number of units
Unit Cost
Unit Profit
$3.24
UNIT
COST
350
+
UNIT
PROFIT
Unit Price
$9.99
UNIT
= PRICE
To find the unit profit, we can do some super-simple algebra.
unit cost + unit profit = unit price
$3.24+ X =$9.99
-$3.24 -$3.24
$0.00+ X =$6.75
X =$6.75
To solve for X remember this simple rule of algebra:
Anything you do to one side of the equal sign,
you have to do to the other side. In this case, we
subtracted $3.24 from each side of the equal sign.
That gave us our “X” all by itself on one side, and a
number on the other side — and those are the best
kind of equations, right?
COST
Total Cost
$1135
PROFIT
PRICE
Total Profit
Total Price
Number of units
Unit Cost
350
Unit Profit
$3.24
$6.75
Unit Price
$9.99
Give yourself a star if you realize that you could just as easily do: Unit Price - Unit Cost = Unit Profit!
Mathematically speaking, it’s the same thing!
We’re almost there!
Remember this?
Well all we have to
do is multiply the
“unit” numbers by
the number of items,
and we’ll have our
two missing “total”
numbers...
COST
t
cos
l
a
totCost
s...
l
Total
a
equ
er
umb
n
the units
of
the
s
e
UnittCost
t
im
cos
t
i
un
x
PROFIT
fit
pro
l
a
totProfit
s...
l
Total
a
equ
er
umb
n
e units
s
Number
thof
unit
f
o
the
s
e
UnittProfit
im
ofit
r
p
unit
x
PRICE
e
pric
l
ota ls...
TotaltPrice
a
equ
er
umb
n
the units
of
the
s
e
Unit Price
tim price
unit
x
To find total profit, we multiply unit profit by the total number of units
total profit = unit profit x number of units
total profit = $6.75 x 350
total profit = $2362.50
COST
Total Cost
$1135
PROFIT
PRICE
Total Profit
Total Price
$2362.50
Number of units 350
Unit Cost
$3.24
x
Unit Profit
$6.75
$3496.50
x
Unit Price
$9.99
To find total price, we multiply unit price by the total number of units
total price = unit price x number of units
total price = $9.99 x 350
total price = $3496.50
Hey, you fraud!
I just checked my work. I
subtracted the total profit from
the total price, and I got $1134 -not $$1135! What gives?
That difference is due
to rounding. I’m glad
you checked yourself.
Just be careful not to
wreck yourself.
So, I finished my chart. Now what?
Now, you can do all sorts of things with this chart. You can see what happens when you change the unit price, for example. You
can experiment with lowering the unit price — do you still cover your unit cost? Or you can say, “Hey, I wanna make at least $5
per item on these freaking bunnies... what unit price would I need to do that?” You can determine how much money you stand
to make with the merchandise when (and if) you sell out (that’d be your total profit).
Most importantly, you can determine your break-even point...
Break-even point
Your break-even point is the point at which you’ve sold enough items to cover all of your costs. In other words, you may very well
want to know how many of these duckies do you need to sell in order to cover your costs. Let’s go back to our example.
My total cost is
$1135. So how many
duckies do I have to
sell — at the unit price
of $9.99 apiece — in
order to reach that
number?
Total Cost
That’s easy. Divide
the total cost by the
unit price, and you
have your break-even
number. Watch...
Unit Cost
COST
$1135
PROFIT
PRICE
Total Profit
Total Price
Unit Profit
Unit Price
$2362.50
Number of units 350
$3.24
$3496.50
$6.75
$9.99
Total cost ÷ Unit Price = Break-even point
$1135 ÷ $9.99 =
113.61
You need to sell about 114 duckies to cover all of your costs. So what do you think? Is this reasonable?
Do you think you will be able to sell that many duckies at $9.99 apiece? If the answer is no, you may
want to re-think selling this line of merchandise in the first place. Or you may want to go back and
adjust your numbers. Perhaps taking a lower unit profit will lower the unit price (and, therefore, spur
higher sales).
Accounting for distribution
Now, this takes a little fancy footwork, but you can totally do this. If distribution is a likely option for your merchandise, you have
to make sure that you’ve set your unit price high enough that you can still cover your costs after selling your merchandise to the
distributor at their standard discount. If you’re producing a book, this is a very real possibility.
Distribution works like this. You sell your merchandise to the distributor for a discount. They, in turn, sell your merchandise to a
store owner (a retailer) for a little bit more (this is called “wholesale”). The retailer sells it for the original unit price that you set
way back in the beginning of this whole mess. The retailer’s profit is the difference between her retail price and her wholesale
price. Neat, huh?
It is right up until you realize that the unit price you originally set for your item isn’t going to leave enough profit for you after the
distributor takes his discount!
So let’s take the example of a book that you’re self publishing. Here’s the beginning of the chart
COST
Total Cost
$3250
PROFIT
PRICE
Total Profit
Total Price
Number of units
Unit Cost
$3.25
1,000
Unit Profit
Unit Price
Now... how can I make sure my unit price is high enough that I can still cover my costs
after the distributor take his discount? First, I find out what the distributor’s discount is.
The industry-standard discount for distribution in the book industry is 65% off the cover
price. So, my mathematical puzzle is this: At what price can I subtract 65% of that price
and still have a number greater than my unit cost ($3.25)?
Let’s do that in math talk.
Unit price - (65% x Unit price) = Unit cost + Unit Profit
Why are we multiplying 65% by the
unit price? to find out what 65% of that
number is. Confused? Read this.
Let’s use “p” to stand for unit price, and fill in what we know... the unit cost.
p - (0.65 x p) = 3.25 + Unit Profit
The unit profit, in this case, is determined by you! How much profit do you want to have
left when you sell this book through a distributor. Remember, the higher you make this
number, the higher your final retail price will be —and that may dampen sales. In this
case, let’s take a modest $5 profit per book (after distributor discount).
p - (0.65 x p) = 3.25 + 5
p - (0.65 x p) = 8.25
p - (0.65p) = 8.25
p - 0.65p = 8.25
All we have to do is figure out what P minus 0.65P is, and we’re halfway home. First of
all, we know that in algebra, any time we see a letter standing alone, there’s actually an
invisible “1” next to it. That’s no big deal. It’s basically the same as saying “1 times that
letter.” And 1 times any number is that same number. Which is why we usually make it
invisible. Cause it’s kinda stupid. But in this case, it’s gonna make out lives easier. So
let’s de-cloak that “1”.
1P - 0.65p = 8.25
Now, since both of those numbers have the same letter after them, we can treat them
like family. We ignore the Ps (just like you ignore your family) and do the math. First, let’s
ignore the Ps.
1p - 0.65p = 8.25
Fine. So... what’s 1 minus 0.65? You can do it in your head or you can use a calculator.
Either way, it’s 0.35. Now that the math is done, we have to stop ignoring that P. You know
what they say. Give Ps a chance.
0.35p = 8.25
But look how close we got! All we have to do is get that “p” to stand alone. Like Uncle Ed
after Thanksgiving dinner. But how? Well it’s the patented Guigar technique of solving
equations: You can do anything to the left-hand side of the equal sign, as long as you
do the same thing to the right-hand side. So to get “p” to stand alone — in other words,
to change that 0.35 to a nice “1” that we can make invisible, we have only one choice —
divide the left side of the equal sign by 0.35. Why? ‘Cause any number divided by itself is
always 1. Try it: 0.35 divided by 0.35 = 1. See?
Therefore...
What is a
percentage?
Let’s break it down. “Cent”
is a latin root for 100.
That’s why a century is a
hundred years, and it’s why
one cent is 1/100th of a
dollar. Which one has a
hundred legs? A centipede
or a millipede? I don’t know
either but it’s crawling up
your arm!
“Per” means “for every.” So
“Percent” literally means
“for every 100.”
65% means for every 100,
you get 65.
But there’s a simpler way
of saying that: 65/100.
What’s 65 divided by 100?
It’s 0.65.
Wanna skip all the hoo-ha?
Just move the decimal two
places to the left.
So to turn 65.0 into a
percentage, move the
decimal point two places to
the left an voila — 0.65!
How do you find 65% of a
given number? Easy peasy.
just multiply that number
by the decimal equivalent
of 65 (which is 0.65).
So 65% of 100 is 65. (Go
ahead — check it on a
calculator.) 65% of 350?
That’d be 350 x 0.65 =
227.
Aren’t you glad you asked?
We’ve got a clear shot at solving this puppy. We’ll divide both sides of the equal sign by 0.35.
0.35p = $8.25
÷ 0.35 ÷ 0.35
1p
= $23.57
We did it! Our unit price is $23.57. At that price, we can sell our books to a distributor at 65% off the cover price and still make
$5 profit per book!